Mt. Gox faced questions on handling client cash long before crisis

SummaryTwo years before Mt. Gox filed for bankruptcy, a half dozen employees at the Tokyo-based bitcoin exchange challenged CEO Mark Karpeles over whether client money was being used to cover costs, according to three people who participated in the discussion.

Two years before Mt. Gox filed for bankruptcy, a half dozen employees at the Tokyo-based bitcoin exchange challenged CEO Mark Karpeles over whether client money was being used to cover costs, according to three people who participated in the discussion.

The question of how Mt. Gox handled other people's money - the issue raised by staff in the showdown with Karpeles in early 2012 - remains crucial to unravelling a multi-million dollar mystery under examination by authorities in Japan.

A bankruptcy administrator and police are seeking to determine how a Tokyo start-up that shot from obscurity to dominate global trade in bitcoin managed to lose more than $27 million in old-fashioned cash held in a bank as well as bitcoins worth close to $450 million at today's prices.

The still-unresolved issue has thrown a spotlight on how Mt. Gox functioned as a hybrid between an online brokerage and an exchange. Essentially, the more than 1 million traders who used Mt. Gox at its peak had entrusted a 3-year-old firm to hold their money safely until they decided to cash out.

A court-appointed bankruptcy administrator on Friday said an initial examination of Mt. Gox - key to determining whether Mt. Gox's users will be able to recover some of what they had on deposit with the exchange - would not be complete until May, citing the involvement of authorities in the case.

GROWING STRAINS

In interviews with Reuters, current and former employees at Mt. Gox described the strains that emerged over the handling of customer money just as the firm was gearing up for expansion and bitcoin was edging out of the shadows as an investment and a means of online settlement.

By early 2012, a small group of Mt. Gox employees, all of whom worked on one-year contracts, began to worry that customer funds had been diverted to cover operating costs that they estimated to be rising. Those costs included rent in a Tokyo high-rise that also housed offices for Hulu and Google, high-tech gadgets such as a robot and a 3-D printer and a souped-up, racing version of the Honda Civic imported from Britain for Karpeles, people who have reviewed expenses said.

Unlike Karpeles, the employees say they did not have access to the financial records of Mt. Gox. They asked for a formal meeting with the then-26-year-old Karpeles in early 2012, those involved said, and asked him to respond to their estimate that Mt. Gox was